'Time-off plans' may be an efficient and economic way to manage employee pay. But how does an employer ensure a plan complies with the Fair Labor Standards Act?

Private employers seeking to take advantage of Fair Labor Standards Act provisions that allow "time-off plans" for non-exempt employees often face a conundrum: how to reconcile a "time-off plan" with the FLSA's overtime pay requirements?

The FLSA requires employers to pay non-exempt employees a minimum hourly wage and a premium pay rate for any work in excess of 40 hours per week. The congressional purpose behind the FLSA is twofold: (1) to bring about greater employment by providing a financial disincentive to employers who require overtime hours and (2) to compensate employees for the burden of a lengthier workweek.

The Wage and Hour Division of the Department of Labor and the courts interpret the FLSA as requiring overtime to be figured on the basis of a single workweek.

Under certain conditions, however, an employer can pay the same amount each pay period even when an employee works overtime during one or more weeks. The DOL and the courts have approved time-off plans that balance overtime—not average it.

Time-off plans allow an employer to schedule an employee off a number of hours during one week of the pay period so the wage or salary equals the desired amount of compensation for that employee even when the employee works overtime the following week. Specifically, federal courts have held that "it is permissible for the employer employing one at a fixed salary for a fixed workweek to lay off the employee a sufficient number of hours during some other week or weeks of the pay period to offset the amount of overtime worked so that the desired wage or salary for the pay period covers the total amount of compensation, including overtime."

There is no requirement under the FLSA that overtime compensation be paid weekly. The employer can require that an employee accept the time off in lieu of overtime provided it is covered under the same pay period.

Here is how it could work, assuming a two-week pay period:

In Week One the employee works 44 hours (four nine-hour days, one eight-hour day). That employee has thus accrued four hours of overtime that should be paid time and a half. In lieu of that premium pay for overtime, in Week Two the employer can allow six hours of time off (four times x time and a half). If the time off is not taken in Week Two, then the employee must be paid for the overtime.

The time off cannot accrue from week to week in order to create a bank of leave time to be used toward a larger amount of paid leave. Also keep in mind that if an employee works the 44 hours in Week One and he or she leaves the employment or is terminated in Week Two, the employer must pay that employee overtime for Week One.

The idea behind the time-off plan is to give the employer control over an employee's earnings by controlling the number of hours an employee is permitted to work. Because time has to be "balanced" over several weeks in a pay period, employers cannot implement time-off plans for employees who are paid weekly. The time off cannot be accumulated in one pay period to be used in another. Moreover, this is not a "use-it-or-lose-it" policy; it is a "use-it-or-be-paid-for-it" policy. If the employee does not use the time off in the following week and works a full 40 hours, the employer must pay overtime from the previous week.

Employers are constantly looking for new ways to manage employee pay in a way that fits their business. Time-off plans can be an efficient, economic and legal way to do so when implemented correctly. Due to the strictures of the FLSA and the administrative difficulties in managing time-off plans, employers are encouraged to consult with counsel prior to implementing a time-off plan.

Andrew Naylor is a partner and leader of the Labor and Employment Practice Group at Waller Lansden Dortch & Davis in Nashville, Tenn. Brian Clifford is an attorney at Waller Lansden Dortch & Davis. Comment below or email editors@workforce.com.

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